financial management

Family summer visits and trips are in the rear view–as well as the simultaneous demands of balancing the responsibilities of a, you know, day job–and so it is time to take up blogging once again.

I will return to my running topic of Integrated Program and Project Management in short order, but a topic of more immediate interest concerns the article that appeared on the website for pogo.org last week entitled “Pentagon’s Contracting Gurus Mismanaged Their Own Contracts.” Such provocative headlines are part and parcel of organizations like POGO, which have an agenda that seems to cross the line between reasonable concern and unhinged outrage with a tinge conspiracy mongering. But the content of the article itself is accurate and well written, if also somewhat ripe with overstatement, so I think it useful to unpack what it says and what it means.

POGO begins the article by stating that DCMA administers over $5 trillion in contracts for the Department of Defense. The article erroneously asserts that it also negotiates these contracts, apparently not understanding the process of contract oversight and administration. The cost of IWMS was apparently $46.6M and the investigation into the management and administration of the program was initiated by the then-Commander of DCMA, Lieutenant General Wendy Masiello, shortly before she retired from the government in May 2017.

The implication here, given the headline, seems to be that if there is a problem in internal management within the agency, then that would translate into questioning its administration of the $5 trillion in contract value. I view it differently, given that I understand that there are separate lines of responsibility in the agency that do not overlap, particularly in IT. Of the $46.6M there is a question of whether $17M in value was properly funded. More on this below, but note that, to put things in perspective, $46.6M is .000932% of DCMA’s oversight responsibility. This is aside from the fact that the comparison is not quite correct, given that the CIO had his own budget, which was somewhat smaller and unrelated to the $5 trillion figure. But I think it important to note that POGO’s headline and the introduction of figures, while sounding authoritative, are irrelevant to the findings of the internal investigation and draft report. This is a scare story using scare numbers, particularly given the lack of context. I had some direct experience in my military career with issues inspired by the POGO’s founders’ agenda that I will cover below.

In addition to the internal investigation on IWMS, there was also an inspector general (IG) investigation of thirteen IT services contracts that resulted in what can only be described as pedestrian procedural discrepancies that are easily correctable, despite the typically overblown language found in most IG reports. Thus, I will concentrate on this post on the more serious findings of the internal investigation.

My Own Experience with DCMA

A note at this point on full disclosure: I have done business with and continue to do business with DCMA, both as a paid supplier of software solutions, and have interacted with DCMA personnel at publicly attended professional forums and workshops. I have no direct connection, as far as I am aware, to the IWMS program, though given that the assessment is to the IT organization, it is possible that there was an indirect relationship. I have met Lieutenant General Masiello and dealt with some of her subordinates not only during her time at DCMA, but also in some of her previous assignments in Air Force. I always found her to be an honest and diligent officer and respect her judgment. Her distinguished career speaks for itself. I have talked on the telephone to some of the individuals mentioned in the article on unrelated matters, and was aware of their oversight of some of my own efforts. My familiarity with all of them was both businesslike and brief.

As a supplier to DCMA my own contracts and the personnel that administer them were, from time-to-time, affected by the fallout from what I now know to have occurred. Rumors have swirled in our industry regarding the alleged mismanagement of an IT program in DCMA, but until the POGO article, the reasons for things such as a temporary freeze and review of existing IT programs and other actions were viewed as part and parcel of managing a large organization. I guess the explanation is now clear.

The Findings of the Investigation

The issue at hand is largely surrounding the method of source selection, which may have constituted a conflict of interest, and the type of money that was used to fund the program. In reading the report I was reminded of what Glen Alleman recently wrote in his blog entitled “DDSTOP: The Saga Continues.” The acronym DDSTOP means: Don’t Do Stupid Things On Purpose.

There is actually an economic behavioral principle for DDSTOP that explains why people make and double down on bad decisions and irrational beliefs. It is called epistemic sunk cost. It is what causes people to double down in gambling (to the great benefit of the house), to persist in mistaken beliefs, and, as stated in the link above, to “persist with the option which they have already invested in and resist changing to another option that might be more suitable regarding the future requirements of the situation.” The findings seem to document a situation that fits this last description.

In going over the findings of the report, it appears that IWMS’s program violated the following:

a. Contractual efforts in the program that were appropriate for the use of Research, Development, Test and Evaluation (R,D,T & E) funds as opposed to those appropriate for O&M (Operations and Maintenance) funds. What the U.S. Department of Defense calls “color of money.”

b. Amounts that were expended on contract that exceeded the authorized funding documents, which is largely based on the findings regarding the appropriate color of money. This would constitute a serious violation known as an Anti-Deficiency Act violation which, in layman’s terms, is directed to punish public employees for the misappropriation of government funds.

c. Expended amounts of O&M that exceeded the authorized levels.

d. Poor or non-existent program management and cost performance management.

e. Inappropriate contracting vehicles that, taken together, sidestepped more stringent oversight, aside from the award of a software solutions contract to the same company that defined the agency’s requirements.

Some of these are procedural and some are serious, particularly the Anti-deficiency Act (ADA) violations, are serious. In the Contracting Officer’s rulebook, you can withstand pedestrian procedural and administrative findings that are part and parcel of running an intensive contracting organization that acquires a multitude of supplies and services under deadline. But an ADA violation is the deadly one, since it is a violation of statute.

As a result of these findings, the recommendation is for DCMA to lose acquisition authority over the DoD micro-contracting level ($10,000). Organizationally and procedurally, this is a significant and mission-disruptive recommendation.

The Role and Importance of DCMA

DCMA performs an important role in contract compliance and oversight to ensure that public monies are spent properly and for the intended purpose. They perform this role mostly on contracts that are negotiated and entered into by other agencies and the military services within the Department of Defense, where they are assigned contract administration duties. Thus, the fact that DCMA’s internal IT acquisition systems and procedures were problematic is embarrassing.

But some perspective is necessary because there is a drive by some more extreme elements in Congress and elsewhere that would like to see the elimination of the agency. I believe that this would be a grave mistake. As John F. Kennedy is quoted as having said: “You don’t tear your fences down unless you know why they were put up.”

For those of you who were not around prior to the formation of DCMA or its predecessor organization, the Defense Contract Management Command (DCMC), it is important to note that the formation of the agency is a result of acquisition reform. Prior to 1989 the contract administration services (CAS) capabilities of the military services and various DoD offices varied greatly in capability, experience, and oversight effectiveness.Some of these duties had been assigned to what is now the Defense Logistics Agency (DLA), but major acquisition contracts remained with the Services.

For example, when I was on active duty as a young Navy Supply Corps Officer as part of the first class that was to be the Navy Acquisition Corps, I was taught cradle-to-grave contracting. That is, I learned to perform customer requirements development, economic analysis, contract planning, development of a negotiating position, contract negotiation, and contract administration–soup to nuts. The expense involved in developing and maintaining the skill set required of personnel to maintain such a broad-based expertise is unsustainable. For analogy, it is as if every member of a baseball club must be able to play all nine positions at the same level of expertise; it is impossible.

Furthermore, for contract administration a defense contractor would have contractual obligations for oversight in San Diego, where I was stationed, that were different from contracts awarded in Long Beach or Norfolk or any of the other locations where a contracting office was located. Furthermore, the military services, having their own organizational cultures, provided additional variations that created a plethora of unique requirements that added cost, duplication, inconsistency, and inter-organizational conflict.

This assertion is more than anecdotal. A series of studies were commissioned in the 1980s (the findings of which were subsequently affirmed) to eliminate duplication and inconsistency in the administration of contracts, particularly major acquisition programs. Thus, DCMC was first established under DLA and subsequently became its own agency. Having inherited many of the contracting field office, the agency has struggled to consolidate operations so that CAS is administered in a consistent manner across contracts. Because contract negotiation and program management still resides in the military services, there is a natural point of conflict between the services and the agency.

In my view, this conflict is a healthy one, as all power in the hands of a single individual, such as a program manager, would lead to more fraud, waste, and abuse, not less. Internal checks and balances are necessary in proper public administration, where some efficiency is sacrificed to accountability. It is not just the goal of government to “make the trains run on time”, but to perform oversight of the public’s money so that there is accountability in its expenditure, and integrity in systems and procedures. In the case of CAS, it is to ensure that what is being procured actually gets delivered in conformance to the contract terms and conditions designed to reduce the inherent risk in complex acquisition programs.

In order to do its job effectively, DCMA requires innovative digital systems to allow it to perform its CAS function. As a result, the agency must also possess an acquisition capability. Given the size of the task at hand in performing CAS on over $5 trillion of contract effort, the data involved is quite large, and the number of personnel geographically distributed. The inevitable comparisons to private industry will arise, but few companies in the world have to perform this level of oversight on such a large economic scale, which includes contracts comprising every major supplier to the U.S. Department of Defense, involving detailed knowledge of the management control systems of those companies that receive the taxpayer’s money. Thus, this is a uniquely difficult job. When one understands that in private industry the standard failure rate of IT projects is more than 70% percent, then one cannot help but be unimpressed by these findings, given the challenge.

Assessing the Findings and Recommendations

There is a reason why internal oversight documents of this sort stay confidential–it is because these are preliminary/draft findings and there are two sides to every story which may lead to revisions. In addition, reading these findings without the appropriate supporting documentation can lead one to the wrong impression and conclusions. But it is important to note that this was an internally generated investigation. The checks and balances of management oversight that should occur, did occur. But let’s take a close look at what the reports indicate so that we can draw some lessons. I also need to mention here that POGO’s conflation of the specific issues in this program as a “poster child” for cost overruns and schedule slippage displays a vast ignorance of DoD procurement systems on the part of the article’s author.

Money, Money, Money

The core issue in the findings revolves around the proper color of money, which seems to hinge on the definition of Commercial-Off-The-Shelf (COTS) software and the effort that was expended using the two main types of money that apply to the core contract: RDT&E and O&M.

Let’s take the last point first. It appears that the IWMS effort consisted of a combination of COTS and custom software. This would require acquisition, software familiarization, and development work. It appears that the CIO was essentially running a proof-of-concept to see what would work, and then incrementally transitioned to developing the solution.

What is interesting is that there is currently an initiative in the Department of Defense to do exactly what the DCMA CIO did as part of his own initiative in introducing a new technological approach to create IWMS. It is called Other Transactional Authority (OTA). The concept didn’t exist and was not authorized until the 2016 NDAA and is given specific statutory authority under 10 U.S.C. 2371b. This doesn’t excuse the actions that led to the findings, but it is interesting that the CIO, in taking an incremental approach to finding a solution, also did exactly what was recommended in the 2016 GAO report that POGO references in their article.

Furthermore, as a career Navy Supply Corps Officer, I have often gotten into esoteric discussions in contracts regarding the proper color of money. Despite the assertion of the investigation, there is a lot of room for interpretation in the DoD guidance, not to mention a stark contrast in interpreting the proper role of RDT&E and O&M in the procurement of business software solutions.

When I was on the NAVAIR staff and at OSD I ran into the difference in military service culture where what Air Force financial managers often specified for RDT&E would never be approved by Navy financial managers where, in the latter case, they specified that only O&M dollars applied, despite whether development took place. Given that there was an Air Force flavor to the internal investigation, I would be interested to know whether the opinion of the investigators in making an ADA determination would withstand objective scrutiny among a panel of government comptrollers.

I am certain that, given the differing mix of military and civil service cultures at DCMA–and the mixed colors of money that applied to the effort–that the legal review that was sought to resolve the issue. One of the principles of law is that when you rely upon legal advice to take an action that you have a defense, unless your state of mind and the corollary actions that you took indicates that you manipulated the system to obtain a result that shows that you intended to violate the law. I just do not see that here, based on what has been presented in the materials.

It is very well possible that an inadvertent ADA violation occurred by default because of an improper interpretation of the use of the monies involved. This does not rise to the level of a scandal. But going back to the confusion that I have faced from my own experiences on active duty, I certainly hope that this investigation is not used as a precedent to review all contracts under the approach of accepting a post-hoc alternative interpretation by another individual who just happens to be an inspector long after a reasonable legal determination was made, regardless of how erroneous the new expert finds the opinion. This is not an argument against accountability, but absent corruption or criminal intent, a legal finding is a valid defense and should stand as the final determination for that case.

In addition, this interpretation of RDT&E vs. O&M relies upon an interpretation of COTS. I daresay that even those who throw that term around and who are familiar with the FAR fully understand what constitutes COTS when the line between adaptability and point solutions is being blurred by new technology.

Where the criticism is very much warranted are those areas where the budget authority would have been exceeded in any event–and it is here that the ADA determination is most damning. It is one thing to disagree on the color of money that applies to different contract line items, but it is another to completely lack financial control.

Part of the reason for lack of financial control was the absence of good contracting practices and the imposition of program management.

Contracts 101

While I note that the CIO took an incremental approach to IWMS–what a prudent manager would seem to do–what was lacking was a cohesive vision and a well-informed culture of compliance to acquisition policy that would avoid even the appearance of impropriety and favoritism. Under the OTA authority that I reference above as a new aspect of acquisition reform, the successful implementation of a proof-of-concept does not guarantee the incumbent provider continued business–salient characteristics for the solution are publicized and the opportunity advertised under free and open competition.

After all, everyone has their favorite applications and, even inadvertently, an individual can act improperly because of selection bias. The procurement procedures are established to prevent abuse and favoritism. As a solution provider I have fumed quite often where a selection was made without competition based on market surveys or use of a non-mandatory GSA contract, which usually turn out to be a smokescreen for pre-selection.

There are two areas of fault on IMWS from the perspective of acquisition practice, and another in relation to program management.

These are the initial selection of Apprio, which had laid out the initial requirements and subsequently failed to have the required integration functionality, and then, the selection of Discover Technologies under a non-mandatory GSA Blanket Purchase Agreement (BPA) contract under a sole source action. Furthermore, the contract type was not appropriate to the task at hand, and the arbitrary selection of Discover precluded the agency finding a better solution more fit to its needs.

The use of the GSA BPA allowed managers, however, to essentially spit the requirements to stay below more stringent management guidelines–an obvious violation of acquisition regulation that will get you removed from your position. This leads us to what I think is the root cause of all of these clearly avoidable errors in judgment.

Program Management 101

Personnel in the agency familiar with the requirements to replace the aging procurement management system understood from the outset that the total cost would probably fall somewhere between $20M and $40M. Yet all effort was made to reduce the risk by splitting requirements and failing to apply a programmatic approach to a clearly complex undertaking.

This would have required the agency to take the steps to establish an acquisition strategy, open the requirement based on a clear performance work statement to free and open competition, and then to establish a program management office to manage the effort and to allow oversight of progress and assessment of risks in a formalized environment.

The establishment of a program management organization would have prevented the lack of financial control, and would have put in place sufficient oversight by senior management to ensure progress and achievement of organizational goals. In a word, a good deal of the decision-making was based on doing stupid things on purpose.

The Recommendations

In reviewing the recommendations of the internal investigation, I think my own personal involvement in a very similar issue from 1985 will establish a baseline for comparison.

As I indicated earlier, in the early 1980s, as a young Navy commissioned officer, I was part of the first class of what was to be the Navy Acquisition Corps, stationed at the Supply Center in San Diego, California. I had served as a contracting intern and, after extensive education through the University of Virginia Darden School of Business, the extended Federal Acquisition Regulation (FAR) courses that were given at the time at Fort Lee, Virginia, and coursework provided by other federal acquisition organizations and colleges, I attained my warrant as a contracting officer. I also worked on acquisition reform issues, some of which were eventually adopted by the Navy and DoD.

During this time NAS Miramar was the home of Top Gun. In 1984 Congressman Duncan Hunter (the elder not the currently indicted junior of the same name, though from the same San Diego district), inspired by news of $7,600 coffee maker and a $435 hammer publicized by the founders of POGO, was given documents by a disgruntled employee at the base regarding the acquisition of replacement E-2C ashtrays that had a cost of $300. He presented them to the Base Commander, which launched an investigation.

I served on the JAG investigation under the authority of the Wing Commander regarding the acquisitions and then, upon the firing of virtually the entire chain of command at NAS Miramar, which included the Wing Commander himself, became the Officer-in-Charge of Supply Center San Diego Detachment NAS Miramar. Under Navy Secretary Lehman’s direction I was charged with determining the root cause of the acquisition abuses and given 60-90 days to take immediate corrective action and clear all possible discrepancies.

I am not certain who initiated the firings of the chain of command. From talking with contemporaneous senior personnel at the time it appeared to have been instigated in a fit of pique by the sometimes volcanic Secretary of Defense Caspar Weinberger. While I am sure that Secretary Weinberger experienced some emotional release through that action, placed in perspective, his blanket firing of the chain of command, in my opinion, was poorly advised and counterproductive. It was also grossly unfair, given what my team and I found as the root cause.

First of all, the ashtray was misrepresented in the press as a $600 ashtray because during the JAG I had sent a sample ashtray to the Navy industrial activity at North Island with a request to tell me what the fabrication of one ashtray would cost and to provide the industrial production curve that would reduce the unit price to a reasonable level. The figure of $600 was to fabricate one. A “whistleblower” at North Island took this slice of information out of context and leaked it to the press. So the $300 ashtray, which was bad enough, became the $600 ashtray.

Second, the disgruntled employee who gave the files to Congressman Hunter had been laterally assigned out of her position as a contracting officer by the Supply Officer because of the very reason that the pricing of the ashtray was not reasonable, among other unsatisfactory performance measures that indicated that she was not fit to perform those duties.

Third, there was a systemic issue in the acquisition of odd parts. For some reason there was an ashtray in the cockpit of the E-2C. These aircraft were able to stay in the air an extended period of time. A pilot had actually decided to light up during a local mission and, his attention diverted, lost control of the aircraft and crashed. Secretary Lehman ordered corrective action. The corrective action taken by the squadron at NAS Miramar was to remove the ashtray from the cockpit and store them in a hangar locker.

Four, there was an issue of fraud. During inspection the spare ashtrays were removed and deposited in the scrap metal dumpster on base. The tech rep for the DoD supplier on base retrieved the ashtrays and sold them back to the government for the price to fabricate one, given that the supply system had not experienced enough demand to keep them in stock.

Fifth, back to the systemic issue. When an aircraft is to be readied for deployment there can be no holes representing missing items in the cockpit. A deploying aircraft with this condition is then grounded and a high priority “casuality report” or CASREP is generated. The CASREP was referred to purchasing which then paid $300 for each ashtray. The contracting officer, however, feeling under pressure by the high priority requisition, did not do due diligence in questioning the supplier on the cost of the ashtray. In addition, given that several aircraft deploy, there were a number of these requisitions that should have led the contracting officer to look into the matter more closely to determine price reasonableness.

Furthermore, I found that buying personnel were not properly trained, that systems and procedures were not established or enforced, that the knowledge of the FAR was spotty, and that procurements did not go through multiple stages of review to ensure compliance with acquisition law, proper documentation, and administrative procedure.

Note that in the end this “scandal” was born by a combination of systemic issues, poor decision-making, lack of training, employee discontent, and incompetence.

I successfully corrected the issues at NAS Miramar during the prescribed time set by the Secretary of the Navy, worked with the media to instill public confidence in the system, built up morale, established better customer service, reduced procurement acquisition lead times (PALT), recommended necessary disciplinary action where it seemed appropriate, particularly in relation to the problematic employee, recovered monies from the supplier, referred the fraud issues to Navy legal, and turned over duties to a new chain of command.

NAS Miramar procurement continued to do its necessary job and is still there.

What the higher chain of command did not do was to take away the procurement authority of NAS Miramar. It did not eliminate or reduce the organization. It did not close NAS Miramar.

It requires leadership and focus to take effective corrective action to not only fix a broken system, but to make it better while the corrective actions are being taken. As I outlined above, DCMA performs an essential mission. As it transitions to a data-driven approach and works to reduce redundancy and inefficiency in its systems, it will require more powerful technologies to support its CAS function, and the ability to acquire those technologies to support that function.

As I’ve written here most recently, the most significant proposal coming out of the Integrated Program Management Conference (IPMC) this year was the comprehensive manner of integrating all essential elements of a project, presented by Glen Alleman et al. In their presentation, Alleman, Coonce, and Price, present a process flow (which, in my estimation, should be mirrored in data and information flow) in which program artifacts were imbued with measures of effectiveness, measures of performance, and measures of progress, to achieve an organic integration of all parts of the project that allow the project team to make a valid assessment of achievement against the plan, informed by risk and opportunity. (Emphasis my own). The three-legged stool of cost, schedule, and technical performance are thereby integrated properly at the appropriate level of the project structure, and done in such a way as to overcome the rigidity and fallacy of the single point estimate.

But, as is always the case with elegant models, while they replicate a sufficient portion of reality to allow us to make our assessments using statistical methods, there are other elements that we have purposely left out because our present models do not incorporate them into the normal and normative process. They are considered situational, and so lie just outside of the process flow, though they insert themselves when necessary–and much more frequently than desired. I am referring to the availability of money and resources, and the manner in which they affect the project: through work authorizations (WADs) and baseline change requests (BCRs).

I have seen situations where fully 90% of the effort in project management is devoted to manage and adjust the plan based on baseline changes. This is particularly the case where estimates are poorly developed due to the excuse of uncertainty. Of course there is uncertainty–that’s the purpose of developing a plan. The issue isn’t the presence of risk (and opportunity) but that our risks are educated ones, that is, informed by familiarity with similar efforts, engineering assessment, core competency, and other empirical factors. This is where the most radical elements of the Agile Cult gets it wrong–in focusing on risk and assuming that the only way to realize opportunity is to forgo the empirical process. This is not only a misreading of risk and opportunity assessment in project management, it is a sort of neo-Luddite position regarding scientific management.

The environment in which a project operates undergoes change. The framing assumptions of the project determine the expectations of scope, cost, and what defines success. The concept of framing assumptions was fully developed in a RAND study that I covered in a previous blog post. Most often, but not always, the change in framing assumptions is reflected in the WAD and BCR process, most often in the latter. Thus, we have a means of determining and taking account of changes in framing assumptions. This is in the normal process of project management, as opposed to the more obvious examples of a complete replan or over target baseline (OTB).

So where do we track WADs and BCRs in our processes that will provide us sufficient indicators in our measures of effectiveness, performance, and progress that our resources (both size and type) many not be sufficient or that these changes are sufficient enough that our framing assumptions have changed? I would argue that the linkage for resources must also be made through the Integrated Master Plan (IMP) and reflect in the IMS, cross-referenced to the PMB. Technology can provide the remainder of the ability to integrate these elements and provide the process flow necessary to provide early warning. This integration goes beyond the traditional focus on cost and schedule (and the newly reintroduced emphasis on technical achievement). It involves integration with resource management systems (personnel, skillset assignments, etc.) as well as financial management systems to determine the availability of money (both its sufficiency and “color”*) being applied to the right place at the right time.

Integrating these elements together then allows for more sophisticated methods of determining project success through the introduction of metrics that provide correlations between the elements. It also answers, absent politics, the optimum level of both analysis and reporting.

*The “color” of money applies mostly to public investments in which monies appropriated are designed by their purpose: operations, maintenance, engineering, R&D, etc.

Note: This post was modified to add a point of clarification in applying WADs and BCRs to the PMB.

Some early comments via e-mails on my post on why Excel is not a PM tool raised the issue that I was being way too hard on IT shops and letting application providers off the hook. The asymmetry was certainly not the intention (at least not consciously).

When approaching an organization seeking process and technology improvement, oftentimes the condition of using Excel is what we in the technology/PM industry conveniently call “workarounds.” Ostensibly these workarounds are temporary measures to address a strategic or intrinsic organizational need that will eventually be addressed by a more cohesive software solution. In all too many cases, however, the workaround turns out to be semi-permanent.

A case in point in basic project management concerns Work Authorizations Documents (WADs) and Baseline Change Requests (BCRs). Throughout entire industries who use the most advanced scheduling applications, resource management applications, and–where necessary–earned value “engines,” the modus operandi to address WADs and BCRs is to either use Excel or to write a custom app in FoxPro or using Access. This is fine as a “workaround” as long as you remember to set up the systems and procedures necessary to keep the logs updated, and then have in place a procedure to update the systems of record appropriately. Needless to say, errors do creep in and in very dynamic environments it is difficult to ensure that these systems are in alignment, and so a labor-intensive feedback system must also be introduced.

This is the type of issue that software technology was designed to solve. Instead, software has fenced off the “hard’ operations so that digitized manual solutions, oftentimes hidden from plain view from the team by the physical technological constraint of the computer (PC, laptop, etc.), are used. This is barely a step above what we did before the introduction of digitization: post the project plan, milestone achievements, and performance on a VIDS/MAF board that surrounded the PM control office, which ensured that every member of the team could see the role and progress of the project. Under that system no one hoarded information, it militated against single points of failure, and ensured that disconnects were immediately addressed since visibility ensured accountability.

In many ways we have lost the ability to recreate the PM control office in digitized form. Part of the reason resides in the 20th century organization of development and production into divisions of labor. In project management, the specialization of disciplines organized themselves around particular functions: estimating and planning, schedule management, cost management, risk management, resource management, logistics, systems engineering, operational requirements, and financial management, among others. Software was developed to address each of these areas with clear lines of demarcation drawn that approximated the points of separation among the disciplines. What the software manufacturers forgot (or never knew) was that the PMO is the organizing entity and it is an interdisciplinary team.

To return to our example: WADs and BCRs; a survey of the leading planning and scheduling applications shows that while their marketing literature addresses baselines and baseline changes (and not all of them address even this basic function), they still do not understand complex project management. There is a difference between resources assigned to a time-phased network schedule and the resources planned against technical achievement related to the work breakdown structure (WBS). Given proper integration they should align. In most cases they do not. This is why most scheduling application manufacturers who claim to measure earned value, do not. Their models assume that the expended resources align with the plan to date, in lieu of volume-based measurement. Further, eventually understanding this concept does not produce a digitized solution, since an understanding of the other specific elements of program control is necessary.

For example, projects are initiated either through internal work authorizations in response to a market need, or based on the requirements of a contract. Depending on the mix of competencies required to perform the work financial elements such as labor rates, overhead, G&A, allowable margin (depending on contract type), etc. will apply–what is euphemistically called “complex rates.” An organization may need to manage multiple rate sets based on the types of efforts undertaken, with a many-to-many relationship between rate sets and projects/subprojects.

Once again, the task of establishing the proper relationships at the appropriate level is necessary. This will then affect the timing of WAD initiation, and will have a direct bearing on the BCR approval process, given that it is heavily influenced by “what-if?” analysis against resource, labor, and financial availability and accountability (a complicated process in itself). Thus the schedule network is not the only element affected, nor the overarching one, given the assessed impact on cost, technical achievement, and qualitative external risk.

These are but two examples of sub-optimization due to deficiencies in project management applications. The response–and in my opinion a lazy one (or one based on the fact that oftentimes software companies know nothing of their customers’ operations)–has been to develop the alternative euphemism for “workaround”: best of breed. Oftentimes this is simply a means of collecting revenue for a function that is missing from the core application. It is the software equivalent of division of labor: each piece of software performs functions relating to specific disciplines and where there are gaps these are filled by niche solutions or Excel. What this approach does not do is meet the requirements of the PMO control office, since it perpetuates application “swim lanes,” with the multidisciplinary requirements of project management relegated to manual interfaces and application data reconciliation. It also pushes–and therefore magnifies–risk at the senior level of the project management team, effectively defeating organizational fail safes designed to reduce risk through, among other methods, delegation of responsibility to technical teams, and project planning and execution constructed around short duration/work-focused activities. It also reduces productivity, information credibility, and unnecessarily increases cost–the exact opposite of the rationale used for investing in software technology.

It is time for this practice to end. Technologies exist today to remove application “swim lanes” and address the multidisciplinary needs of successful project management. Excel isn’t the answer; cross-application data access, proper data integration, and data processing into user-directed intelligence, properly aggregated and distributed based on role and optimum need to know, is.

A lot of ink has been devoted to what constitutes “best practices” in PM but oftentimes these discussions tend to get diverted into overtly commercial activities that promote a set of products or trademarked services that in actuality are well-trod project management techniques given a fancy name or acronym. We see this often with “road shows” and “seminars” that are blatant marketing events. This tends to undermine the desire of PM professionals to find out what really gives us good information by both getting in the way of new synergies and by tying “best practices” to proprietary solutions. All too often “common practice” and “proprietary limitations” pass for “best practice.”

Recently I have been involved in discussions and the formulation of guides on indicators that tell us something important regarding the condition of the project throughout its life cycle. All too often the conversation settles on earned value with the proposition that all indicators lead back to it. But this is an error since it is but one method for determining performance, which looks solely at one dimension of the project.

There are, after all, other obvious processes and plans that measure different dimensions of project performance. The first such example is schedule performance. A few years ago there was an attempt to more closely tie schedule and cost as an earned value metric, which was and is called “earned schedule.” In particular, it had many strengths against what was posited as its alternative–schedule variance as calculated by earned value. But both are a misnomer, even when earned schedule is offered as an alternative to earned value while at the same time adhering to its methods. Neither measures schedule, that is, time-based performance against a plan consisting of activities. The two artifacts can never be reconciled and reduced to one metric because they measure different things. The statistical measure that would result would have no basis in reality, adding an unnecessary statistical layer that obfuscates instead of clarifying the underlying condition. So what do we look at you may ask? Well–the schedule. The schedule itself contains many opportunities to measure its dimension in order to develop useful metrics and indicators.

For example, a number of these indicators have been in place for quite some time: Baseline Execution Index (BEI), Critical Path Length Index (CPLI), early start/late start, early finish/late finish, bow-wave analysis, hit-miss indices, etc. These all can be found in the literature, such as here and here and here.

Typically, then, the first step toward integration is tying these different metrics and indicators of the schedule and EVM dimensions at an appropriate level through the WBS or other structures. The juxtaposition of these differing dimensions, particularly in a grid or GANTT, gives us the ability to determine if there is a correlation between the various indicators. We can then determine–over time–the strength and consistency of the various correlations. Further, we can take this one step further to conclude which ones lead us to causation. Only then do we get to “best practice.” This hard work to get to best practice is still in its infancy.

But this is only the first step toward “integrated” performance measurement. There are other areas of integration that are needed to give us a multidimensional view of what is happening in terms of project performance. Risk is certainly one additional area–and a commonly heard one–but I want to take this a step further.

For among my various jobs in the past included business management within a project management organization. This usually translated into financial management, but not traditional financial management that focuses on the needs of the enterprise. Instead, I am referring to project financial management, which is a horse of a different color, since it is focused at the micro-programmatic level on both schedule and resource management, given that planned activities and the resources assigned to them must be funded.

Thus, having the funding in place to execute the work is the antecedent and, I would argue, the overriding factor to project success. Outside of construction project management, where the focus on cash-flow is a truism, we see this play out in publicly funded project management through the budget hearing process. Even when we are dealing with multiyear R&D funding the project goes through this same process. During each review, financial risk is assessed to ensure that work is being performed and budget (program) is being executed. Earned value will determine the variance between the financial plan and the value of the execution, but the level of funding–or cash flow–will determine what gets done during any particular period of time. The burn rate (expenditure) is the proof that things are getting done, even if the value may be less than what is actually expended.

In public funding of projects, especially in A&D, the proper “color” of money (R&D, Operations & Maintenance, etc.) available at the right time oftentimes is a better predictor of project success than the metrics and indicators which assume that the planned budget, schedule, and resources will be provided to support the baseline. But things change, including the appropriation and release of funds. As a result, any “best practice” that confines itself to only one or two of the dimensions of project assessment fail to meet the definition.

In the words of Gus Grissom in The Right Stuff, “No bucks, no Buck Rogers.”

a. Additional tools are needed to achieve the intended functionality apart from the core application;

b. Technical support is poor or nonexistent;

c. Personnel in the organization still rely on spreadsheets to extend the functionality of the application;

d. Training on the tool takes more time than training the job;

e. The software tool adds work instead of augmenting or facilitating the achievement of work.

I have seen situations where all of these conditions are at work but the response, in too many cases, has been “well we put so much money into XYZ tool with workarounds and ‘bolt-ons’ that it will be too expensive/disruptive to change.” As we have advanced past the first phases of digitization of data, it seems that we are experiencing a period where older systems do not quite match up with current needs, but that software manufacturers are very good at making their products “sticky,” even when their upgrades and enhancements are window dressing at best.

In addition, the project management community, particularly focused on large projects in excess of $20M is facing the challenge of an increasingly older workforce. Larger economic forces at play lately have exacerbated this condition. Aggregate demand and, on the public side, austerity ideology combined with sequestration, has created a situation where highly qualified people are facing a job market characterized by relatively high unemployment, flat wages and salaries, depleted private retirement funds, and constant attacks on social insurance related to retirement. Thus, people are hanging around longer, which limits opportunities for newer workers to grow into the discipline. Given these conditions, we find that it is very risky to one’s employment prospects to suddenly forge a new path. People in the industry that I have known for many years–and who were always the first to engage with new technologies and capabilities–are now very hesitant to do so now. Some of this is well founded through experience and consists of healthy skepticism: we all have come across snake oil salesmen in our dealings at one time or another, and even the best products do not always make it due to external forces or the fact that brilliant technical people oftentimes are just not very good at business.

But these conditions also tend to hold back the ability of the enterprise to implement efficiencies and optimization measures that otherwise would be augmented and supported by appropriate technology. Thus, in addition to those listed by Ms. Symonds, I would include the following criteria to use in making the decision to move to a better technology:

a. Sunk and prospective costs. Understand and apply the concepts of sunk cost and prospective cost. The first is the cost that has been expended in the past, while the latter focuses on the investment necessary for future growth, efficiencies, productivity, and optimization. Having made investments to improve a product in the past is not an argument for continuing to invest in the product in the future that trumps other factors. Obviously, if the cash flow is not there an organization is going to be limited in the capital and other improvements it can make but, absent those considerations, sunk cost arguments are invalid. It is important to invest in those future products that will facilitate the organization achieving its goals in the next five or ten years.

b. Sustainability. The effective life of the product must be understood, particularly as it applies to an organization’s needs. Some of this overlaps the points made by Ms. Symonds in her article but is meant to apply in a more strategic way. Every product, even software, has a limited productive life but my concept here goes to what Glen Alleman pointed out in his blog as “bounded applicability.” Will the product require more effort in any form where the additional effort provides a diminishing return? For example, I have seen cases where software manufacturers, in order to defend market share, make trivial enhancements such as adding a chart or graph in order to placate customer demands. The reason for this should be, but is not always obvious. Oftentimes more substantive changes cannot be made because the product was built on an earlier generation operating environment or structure. Thus, in order to replicate the additional functionality found by newer products the application requires a complete rewrite. All of us operating in this industry has seen this; where a product that has been a mainstay for many years begins to lose market share. The decision, when it is finally made, is to totally reengineer the solution, but not as an upgrade to the original product, arguing that it is a “new” product. This is true in terms of the effort necessary to keep the solution viable, but that then also completely undermines justifications based on sunk costs.

c. Flexibility. As stated previously in this blog, the first generation of digitization mimicked those functions that were previously performed manually. The applications were also segmented and specialized based on traditional line and staff organizations, and specialties. Thus, for project management, we have scheduling applications for the scheduling discipline (such as it is), earned value engines for the EV discipline, risk and technical performance applications for risk specialists and systems engineers, analytical software for project and program analysts, and financial management applications that subsumed project and program management financial management professionals. This led to the deployment of so-called best-of-breed configurations, where a smorgasbord of applications or modules were acquired to meet the requirements of the organization. Most often these applications had and have no direct compatibility, requiring entire staffs to reconcile data after the fact once that data was imported into a proprietary format in which it could be handled. Even within so-called ERP environments under one company, direct compatibility at the appropriate level of the data being handled escaped the ability of the software manufacturers, requiring “bolt-ons” and other workarounds and third party solutions. This condition undermines sustainability, adds a level of complexity that is hard to overcome, and adds a layer of cost to the life-cycle of the solutions being deployed.

The second wave to address some of these limitations focused on data flexibility using cubes, hard-coding of relational data and mapping, and data mining solutions: so-called Project Portfolio Management (PPM) and Business Intelligence (BI). The problem is that, in the first instance, PPM simply another layer to address management concerns, while early BI systems froze in time single points of failure into hard-coded deployed solutions.

A flexible system is one that leverages the new advances in software operating environments to solve more than one problem. This, of course, undermines the financial returns in software, where the pattern has been to build one solution to address one problem based on a specialty. Such a system provides internal flexibility, that is, allows for the application of objects and conditional formatting without hardcoding, pushing what previously had to be accomplished by coders to the customer’s administrator or user level; and external flexibility, where the same application can address, say, EVM, schedule, risk, financial management, KPIs, technical performance, stakeholder reporting, all in the same or in multiple deployed environments without the need for hardcoding. In this case the operating environment and any augmented code provides a flexible environment to the customer that allows one solution to displace multiple “best-of-breed” applications.

This flexibility should apply not only vertically but also horizontally, where data can be hierarchically organized to allow not only for drill-down, but also for roll-up. Data in this environment is exposed discretely, providing to any particular user that data, aggregated as appropriate, based on their role, responsibility, or need to know.

d. Interoperability and open compatibility. A condition of the “best-of-breed” deployment environment is that it allows for sub-optimization to trump organizational goals. The most recent example that I have seen of this is where it is obvious that the Integrated Master Schedule (IMS) and Performance Management Baseline (PMB) were obviously authored by different teams in different locations and, most likely, were at war with one another when they published these essential interdependent project management artifacts.

But in terms of sustainability, the absence of interoperability and open compatibility has created untenable situations. In the example of PMB and IMS information above, in many cases a team of personnel must be engaged every month to reconcile the obvious disconnectedness of schedule activities to control accounts in order to ensure traceability in project management and performance. Surely, not only should there be no economic rewards for such behavior, I believe that no business would perform in that manner without them.

Thus, interoperability in this case is to be able to deal with data in its native format without proprietary barriers that prevent its full use and exploitation to the needs and demands of the customer organization. Software that places its customers in a corner and ties their hands in using their own business information has, indeed, worn out its welcome.

The reaction of customer organizations to the software industry’s attempts to bind them to proprietary solutions has been most marked in the public sector, and most prominently in the U.S. Department of Defense. In the late 1990s the first wave was to ensure that performance management data centered around earned value was submitted in a non-proprietary format known as the ANSI X12 839 transaction set. Since that time DoD has specified the use of the UN/CEFACT XML D09B standard for cost and schedule information, and it appears that other, previously stove-piped data will be included in that standard in the future. This solution requires data transfer, but it is one that ensures that the underlying data can be normalized regardless of the underlying source application. It is especially useful for stakeholder reporting situations or data sharing in prime and sub-contractor relationships.

It is also useful for pushing for improvement in the disciplines themselves, driving professionalism. For example, in today’s project management environment, while the underlying architecture of earned value management and risk data is fairly standard, reflecting a cohesiveness of practice among its practitioners, schedule data tends to be disorganized with much variability in how common elements are kept and reported. This also reflects much of the state of the scheduling discipline, where an almost “anything goes” mentality seems to be in play reflecting not so much the realities of scheduling practice–which are pretty well established and uniform–as opposed to the lack of knowledge and professionalism on the part of schedulers, who are tied to the limitations and vagaries of their scheduling application of choice.

But, more directly, interoperability also includes the ability to access data (as opposed to application interfacing, data mining, hard-coded Cubes, and data transfer) regardless of the underlying database, application, and structured data source. Early attempts to achieve interoperability and open compatibility utilized ODBC but newer operating environments now leverage improved OLE DB and other enhanced methods. This ability, properly designed, also allows for the deployment of transactional environments, in which two-way communication is possible.

A new reality. Thus given these new capabilities, I think that we are entering a new phase in software design and deployment, where the role of the coder in controlling the UI is reduced. In addition, given that the large software companies have continued to support a system that ties customers to proprietary solutions, I do not believe that the future of software is in open source as so many prognosticators stated just a few short years ago. Instead, I propose that applications that behave like open source but allow those who innovate and provide maximum value, sustainability, flexibility, and interoperability to the customer are those that will be rewarded for their efforts.

Note: This post was edited for clarity and grammatical errors from the original.

The question in the title refers to agile in the “traditional” sense and not the big “A” appropriated sense. But I’ll talk about big “A” Agile also.

It also refers to a number of discussions I have been engaged in recently among some of the leading practitioners in the program and project management community. Here are few data points:

a. GAO and other oversight agencies have been critical of changing requirements over the life cycle of a project, particularly in DoD and other federal agencies, that contribute to cost growth. The defense of these changes has been that many of them were necessary in order to meet new circumstances. Okay, sounds fair enough.

But to my way of thinking, if the change(s) were necessary to keep the project from being obsolete upon deployment of the system, or were to correct an emergent threat that would have undermined project success and its rationale, then by all means we need to course correct. But if the changes were not to address either of those scenarios, but simply to improve the system at more than marginal cost, then it was unnecessary.

How can I make such a broad statement and what is the alternative? we may ask. My rationale is that the change or changes, if representing a new development involving significant funding, should stand on its own merits, since it is essentially a new project.

All of us who have been involved in complex projects have seen cases where, as a result of development (and quite often failure), that oftentimes we discover new methods and technologies within the present scope that garner an advantage not previously anticipated. This doesn’t happen as often as we’d like but it does happen. In my own survey and project in development of a methodology for incorporating technical performance into project cost, schedule and risk assessments, it was found that failing a test, for example, had value since it allowed engineers to determine pathways for not only achieving the technical objective but, oftentimes, exceeding the parameter. We find that for x% more in investment as a result of the development, test, milestone review, etc. that we can improve the performance of some aspect of the system. In that case, if the cost or effort is marginal then, the improvement is part of the core development process within the original scope. Limited internal replanning may be necessary to incorporate the change but the remainder of the project can largely go along as planned.

Alternatively, however, inserting new effort in the form of changes to major subsystems involves major restructuring of the project. This disrupts the business rhythm of the project, causing a cultural shift within the project team to socialize the change, and to incorporate the new work. Change of this type not only causes what is essentially a reboot of the project, but also tends to add risk to the project and program. This new risk will manifest itself as cost risk initially, but given risk handling, will also manifest itself into technical and schedule risk.

The result of this decision, driven solely by what may seem to be urgent operational considerations, is to undermine project and program timeliness since there is a financial impact to these decisions. Thus, when you increase risk to a program the reaction of the budget holder is to provide an incentive to the program manager to manage risk more closely. This oftentimes will invite what, in D.C. parlance, is called a budget mark, but to the rest of us is called a budget cut. When socialized within the project, such cuts usually are then taken out of management reserve or non-mandatory activities that were put in place as contingencies to handle overall program risk at inception. The mark is usually equal to the amount of internal risk caused by the requirements change. Thus, adding risk is punished, not rewarded, because money is finite and must be applied to projects and programs that demonstrate that they can execute the scope against the plan and expend the funds provided to them. So the total scope (and thus cost) of the project will increase, but the flexibility within the budget base will decrease since all of that money is now committed to handle risk. Unanticipated risk, therefore, may not be effectively handled in the future.

At first the application of a budget mark in this case may seem counterintuitive, and when I first went through the budget hearing process it certainly did to me. That is until one realizes that at each level the budget holder must demonstrate that the funds are being used for their intended purpose. There can be no “banking” of money since each project and program must compete for the dollars available at any one time–it’s not the PM’s money, he or she has use of that money to provide the intended system. Unfortunately, piggybacking significant changes (and constructive changes) to the original scope is common in project management. Customers want what they want and business wants that business. (More on this below). As a result, the quid pro quo is: you want this new thing? okay, but you will now have to manage risk based on the introduction of new requirements. Risk handling, then, will most often lead to increased duration. This can and often does result in a non-virtuous spiral in which requirements changes lead to cost growth and project risk, which lead to budget marks that restrict overall project flexibility, which tend to lead to additional duration. A project under these circumstances finds itself either pushed to the point of not being deployed, or being deployed many years after the system needed to be in place, at much greater overall cost than originally anticipated.

As an alternative, by making improvements stand on their own merits a proper cost-benefit analysis can be completed to determine if the improvement is timely and how it measures up against the latest alternative technologies available. It becomes its own project and not a parasite feeding off of the main effort. This is known as the iterative approach and those in software development know it very well: you determine the problem that needs to be solved, figure out the features and approach that provides the 80% solution, and work to get it done. Improvements can come after version 1.0–coding is not a welfare program for developers as the Agile Cult would have it. The ramifications for project and program managers is apparent: they must not only be aware of the operational and technical aspects of their efforts, but also know the financial impacts of their decisions and take those into account. Failure to do so is a recipe for self-inflicted disaster.

This leads us to the next point.

b. In the last 20+ years major projects have found that the time from initial development to production has increased several times. For example, the poster child for this phenomenon in the military services is the F35 Lightning II jet fighter, also known as the Joint Strike Fighter (JSF), which will continue to be in development at least through 2019 and perhaps into 2021. From program inception in 2001 to Initial Operational Capability (IOC) it will be 15 years, at least, before the program is ready to deploy and go to production. This scenario is being played out across the board in both government and industry for large projects of all types with few exceptions. In particular, software projects tend to either fail or to meet their operational goals in the overwhelming majority of cases. This would suggest that, aside from the typical issues of configuration control, project stability, and rubber baselining, (aside from the self-reinforcing cost growth culture of the Agile Cult) that there are larger underlying causes involved than simply contracting systems, though they are probably a contributing factor.

From a hardware perspective in terms of military strategy there may be a very good reason why it doesn’t matter that certain systems are not deployed immediately. That reason is that, once deployed, they are expensive to maintain logistically. Logistics of deployed systems will compete for dollars that could be better spent in developing–but not deploying–new technologies. The answer, of course, is somewhere in between. You can’t use that notional jet fighter when you needed it half a world away yesterday.

c. Where we can see the effects on behavior from an acquisition systems perspective is in the comparison of independent estimates to what is eventually negotiated. For example, one military service recently gave the example of a program in which the confidential independent estimate was $2.1 billion. The successful commercial contractor team, let’s call them Team A, whose proposal was deemed technically acceptable, made an offer at $1.2 billion while the unsuccessful contractor team, Team B, offered near the independent estimate. Months later, thanks to constructive changes, the eventual cost of the contract will be at or slightly above the independent estimate based on an apples-to-apples comparison of the scope. Thus it is apparent that Team A bought into the contract. Apparently, honesty in proposal pricing isn’t always the best policy.

I have often been asked what the rationale could be for a contractor to “buy-in” particularly for such large programs involving so much money. The answer, of course, is “it depends.” Team A could have the technological lead in the systems being procured and were defending their territory, thus buying-in, even without constructive changes, was deemed to be worth the tradeoff. Perhaps Team A was behind in the technologies involved and would use the contract as a means of financing their gap. Team A could have an excess of personnel with technical skills that are complimentary to those needed for the effort but who are otherwise not employed within their core competency, so rather than lose them it was worth bidding at or near cost for the perceived effort. These are, of course, the most charitable assumed rationales, though the ones that I have most often encountered.

The real question in this case would be how, even given the judgment of the technical assessment team, the contracting officer would keep a proposal so far below the independent estimate to fall within the competitive range? If the government’s requirements are so vague that two experienced contracting teams can fall so far apart, it should be apparent that the solicitation either defective or the scope is not completely understood.

I think it is this question that leads us to the more interesting aspects of acquisition, program, and project management. For one, I am certain that a large acquisition like the one described is highly visible and of import to the political system and elected officials. In the face of such scrutiny it would have to be a procuring contacting officer (PCO) of great experience and internal fortitude, confident in their judgment, to reset the process after proposals had been received.

There is also pressure in contracting from influencers within the requiring organizations that are under pressure to deploy systems to meet their needs as expeditiously as possible–especially after a fairly lengthy set of activities that must occur prior to the issuance of a solicitation. The development of a good set of requirements is a process that involves multiple stakeholders on highly technical issues is one that requires a great deal of coordination and development by a centralized authority. Absent such guidance the method of approaching requirements can be defective from the start. For example, does the requiring organization write a Statement of Work, a Performance Work Statement, or a Statement of Objectives? Which is most appropriate contract type for the work being performed and the risk involved? Should there be one overriding approach or a combination of approaches based on the subsystems that make up the entire system?

But even given all of these internal factors there are others that are unique to our own time. I think it would be interesting to see how these factors have affected the conditions that everyone in our discipline deems to be problematic. This includes the reduced diversity of the industrial and information verticals upon which the acquisition and logistics systems rely; the erosion of domestic sources of expertise, manufactured materials, and commodities; the underinvestment in training and personnel development and retention within government that undermines necessary expertise; specialization within the contracting profession that separates the stages of acquisition into stovepipes that undermines continuity and cohesiveness; the issuance of patent monopolies that stifle and restrict competition and innovation; and unproductive rent seeking behavior on the part of economic elites that undermine the effectiveness of R&D and production-centric companies. Finally, this also includes those government policies instituted since the early 1980s that support these developments.

The importance of any of these cannot be understated but let’s take the issue of rent seeking that has caused the “financialization” of almost all aspects of economic life as it relates to what a contracting officer must face when acquiring systems. Private sector R&D, which mostly fell in response to economic dislocations in the past–but in a downward trend since the late 1960s overall and especially since the mid 1980s–has fallen precipitously since the bursting of the housing bubble and resultant financial crisis in 2007 with no signs of recovery. Sequestration and other austerity measures in FY 2015 will at the same time will also negatively impact public R&D, continuing the trend overall with no offset. This fall in R&D has a direct impact on productivity and undercuts the effectiveness of using all of the tools at hand to find existing technologies to offset the ones that require full R&D. This appears to have caused a rise in intrinsic risk in the economy as a whole for efforts of this type, and it is this underlying risk that we see at the micro and project management level.

Are there financial payoffs in our performance management metrics where money can be recouped?

That certainly seems to be the case in the opinion of some contracting officers and program managers, particularly in a time of budgetary constraints and austerity. What we are talking about are elements of the project, particularly in aerospace & defense work identified by control accounts within a work breakdown structure (WBS), that are using fewer resources than planned. Is this real money that can be harvested?

Most recently this question arose from the earned value community, in which positive variances were used as the basis for “harvesting” funds to be used to either de-obligate funds or to add additional work. The reason for this question lies in traditional methods of using earned value methods to reallocate funds within contract.

For example, the first and most common is in relation to completed accounts which have a positive variance. That is, accounts where the work is completed and they have underspent their budgeted performance management baseline. Can the resources left over from that work be reallocated and the variances for the completed accounts be set to 1.0? The obvious answer to this is, yes. This constitutes acceptable replanning as long as the contract budget base (CBB) is not increased, and there is no extension to the period of performance. Replans are an effective means for the program team to rebaseline the time-phased performance management baseline (PMB) to internally allocate resources to address risk on those elements that are not performing well against the plan. Keep in mind that this scenario is very limited. It only applies to accounts that are completed where actual money will not be expended for effort within the original control accounts. Also, these resources should be accounted for within the project by first being allocated to undistributed budget (UB), since this money was authorized for specific work. Contracting officers and the customer program manager will then direct where these undistributed funds will be allocated, whether that be to particular control accounts or to management reserve (MR).

In addition to replanning, there are reprogamming and single point adjustment examples–all of which are adequately covered here and here.

But the issue is not one related to EVM. The reason I believe it is not lies in the purpose of earned value management as a project management indicator: it measures the achievement (volume) of work against a financial plan in order to derive the value of the work performed at any particular stage in the life of a project. It does this not only as an oversight and assessment mechanism, but also to provide early warning of the manifestation of risk that threatens the successful execution of the project. Thus, though it began life in the financial management community to derive the value of work performed at a moment in the project plan, it is not a financial management tool. The “money” identified in our earned value management systems is not real in the sense that it exists, other than as an indicator of progress against a financial plan of work accomplishment. To treat this as actual money is to commit the fallacy of reification. That is, to treat an abstraction as if it is the real thing.

The proper place to determine the availability of funds lies in the financial accounting system. The method used for determining funds, particularly in government related contract work, is to first understand the terminology and concepts of funding. Funds can be committed, obligated, or expended. Funds are committed when they are set aside administratively to cover an anticipated liability. Funds are obligated when there is a binding agreement in place, such as a contract or purchase order. Funds are expended when the obligation is paid.

From a contracting perspective, commitments are generally available because they have not been obligated. Obligated funds can be recovered under certain circumstances as determined by the rules relating to termination liability. Thus, the portion of the effort in which funds are de-obligated is considered to be a termination for convenience. Thus, we find our answer to the issue of “harvesting.”

Funds can be de-obligated from a contract as long as sufficient funds remain on the contract to cover the amount of the remaining obligation plus any termination liability. If the contracting officer and program manager wish to use “excess” funds due to the fact that the project is performing better than anticipated under the negotiated contract budget base, then they have the ability to de-obligate those funds. That money then belongs to the source of the funding, not the contracting officer or the program manager, unless one of them is the “owner” of the funds, that is, in government parlance, the budget holder. Tradeoffs outside of the original effort, particularly those requiring new work, must be documented with a contract modification.

From an earned value management and project management perspective, then, we now know what to do. For control accounts that are completed we maintain the history of the effort, even though the “excess” funds being de-obligated from the contract are reflected in positive variances. For control accounts modified by the de-obligation in mid-effort, we rebaseline that work. New work is added to the project plan separately and performance tracked in according to the guidance found in the systems description of the project.

One note of caution: I have seen where contracting officers in Department of Defense work rely on the Contract Funds Status Reports (CFSR) to determine the availability of funds for de-obligation. The CFSR is a projection of funding obligations and expenditures within the project and does not constitute a contractual obligation on the burn rate of funding. Actual obligations and expenditures will vary by all of the usual circumstances that affect project and contract performance. Thus, contracting officers who rely on this document risk both disrupting project management execution and running into an Anti-Deficiency Act violation.

In summary, apart from the external circumstances of a tight budgetary environment that has placed extra emphasis on identifying resources, good financial management housekeeping dictates that accountable personnel as a matter of course be diligent in identifying and recouping uncommitted, unobligated, and unexpended funds. This is the “carry-over” often referred to by public administration professionals. That earned value is used as an early indicator of these groups is a proactive practice. But contracting officers and program managers must understand that it is only that–an indicator.

These professionals must also understand the nature of the work and the manner of planning. I have seen cases, particularly in software development efforts, where risk did not manifest in certain accounts until the last 5% to 10% of work was scheduled to be performed. No doubt this was due to front-loaded planning, pushing risk to the right, and some other defects in project structure, processes, and planning. Regardless, these conditions exist and it behooves contracting and project professionals to be aware that work that appears to be performing ahead of cost and schedule plans may reflect a transient condition.

Note: This content of this article was greatly influenced by the good work of Michael Pelkey in the Office of the Secretary of Defense, though I take full responsibility for the opinions expressed herein, which are my own.